Broken Capital

Quite frankly, I don’t think capitalism works. When I told my co-workers this at lunch, the response was typical: a few people coughed, one person got up and pretended to go do something, and the people sitting next to me acted as if nothing at all had been said, and went on talking about some mundane, sundry, meaningless topic…so, just be warned, people get more nervous than a gay Jewish man at a Nazi rally if you aren’t on board with capitalism.
Seriously though, think about it. All of our economic problems stem from, specifically, credit/investment capitalism. In a free market, buyers and sellers enter into contracts of voluntary exchange, in which someone receives a good or a service in exchange for an agreed upon sum of money. Now this is fine if the exchange remains simple. The problem is when expectations are placed upon the exchange, as is done with credit and investments. Take housing for example. The whole reason the mortgage business crashed was that expectations were placed on the agreement: A) the buyer pays the seller interest because s/he cannot pay the entire amount, and B) the buyer and seller expect the price of the house to rise, at least modestly, so that, hypothetically, the buyer can make money over the long term (and fully pay off what remains on the mortgage) when s/he sells the house, and the seller is insured that his credit risk is backed by real value if the buyer defaults: the house. The lynch pin is the assumption that housing prices will always rise (based on a foolish short term view rooted in the ever increasing expansion of credit), because as we now know, if they fall, both parties in the agreement lose—the buyer cannot now, even if s/he sells their house, pay off the mortgage entirely, and therefore the seller loses too, because they cannot fully recoup their investment from the buyer; nor can they, if the buyer defaults, because the value of the house, even if foreclosed, remains diminished.
This translates easily to nearly any scenario involving credit/investment. We are told to invest in the stock market to secure our future, but if quarterly profits drop, all parties involved lose money…and keep in mind that a loss in profits might not mean the company was not efficient, or that it was poorly run, or that there was even a loss at all. It might simply mean that the company’s performance did not meet the expectations required of the original goal or agreement.
Even a credit card fits into this mold, because again, if the user of the card cannot pay back the funds s/he borrowed, both parties lose—the user is forced to make payments for an extended period with an egregious interest rate, and the lender may not be able to recoup their investment if the user defaults.
OK, so what does this all mean? First of all, we have to understand that any expansion of credit without an associated growth in real wealth for our society, will ultimately lead to an economic collapse—which we are experiencing now. Second, the more our economy depends on credit, debt, and investment, the more violently our economy will swing from prosperity to recession/depression. Third, the attempt by the government to stop or slow said collapse is not sustainable in the long run; however, if it does succeed, it is also socialism that has succeeded. The injection of public money into private companies for government projects is socialism, plain and simple.
I saw a story this morning in the New York Times, decrying the fact that wealthy house owners were getting left out of the government’s plan to bail out people and banks that agreed to bad mortgages. Boo Hoo! We hear everyday about how all these CEO’s and VIP’s are making tons of money even if they haven’t been good stewards at the companies they worked at. Arrghh! And if I hear the term “golden parachute” one more time, I’m going to hit the next person I see in the face with a baseball bat! It’s not fair, and regardless of political affiliation, that fundamentally rubs Americans the wrong way. Personally, I think that if we are going to have a capitalist system, the people that made bad decisions should have to pay for them by losing their job, their house, and their possessions, if necessary. Either that or we ought to give socialism a try, at least for large, public industries, and we can thereby eliminate much of the risk that is inherent in a completely unregulated free market. It is clear that what doesn’t work is capitalizing the gains and socializing the risk, which is where we are now.
So the next time someone attacks socialism, or toots the horn of capitalism, remind them that we are in this mess precisely because of capitalism, and then tell them to get smart and keep their mouth shut in the time being. Or just hit them with a bat.